Building and Marketing a Brand
Unit 2: Managing a Brand for Growth
Lesson 4: Understanding Competitor Positioning
Game Theory and Competitive Reasoning
Let’s talk about Game Theory. It’s a very powerful way of thinking about how competitors should influence our own
marketing decisions. It’s particularly applicable in situations of strategic interdependence. What’s strategic
interdependence?
In many situations in business and in marketing, our outcomes, or payoffs, depend not only on what we do, but also
what our competitors do. Let’s take a very well known example, the example of the Prisoner’s Dilemma.
The story is that two prisoners are arrested for the same crime, taken down to police headquarters and interrogated
in two different cells independently. They each know that they have two options; they can remain silent or they can
confess to the crime, but what sentence they get depends not only on what they do, individually, but what the other
prisoner does simultaneously and independently.
We can represent this in a payoff matrix, where on the one side we have Prisoner 1 and the other Prisoner 2.
Prisoner 1 can remain silent or confess and so too can Prisoner 2, and accordingly they get a sentence. This is the
payoff matrix. If they both remain silent they both get, let’s say, one year in jail. If they both confess they get a stiffer
sentence of, let’s say, 10 years in jail, because now there’s evidence against them. But sometimes, one of them may
confess while the other remains silent, and the one that confesses might get no time in reward for him giving
evidence, while the other goes to jail for, say, 20 years.
So we have this payoff matrix, and so now we can ask ourselves, “What would Prisoner 1 do if he was thinking about
not only what he should do, but also what Prisoner 2 might do?” The way to solve this is as follows. Let’s say I’m
Prisoner 1 and I ask myself, “What if Prisoner 2 remains silent? If Prisoner 2 remains silent and I remain silent, I get
one year in jail, but if I confess, I get no time, I’m off free, so I should confess. Now, what if Prisoner 2 confesses,
what should I do? If Prisoner 2 confesses and I remain silent, I’ll get 20 years in prison, but if I also confess I’ll only
get 10, so I’m better off confessing.” So regardless of what Prisoner 2 does, I’m better off confessing, and so I’ll
confess, and the same logic holds for Prisoner 2. Regardless of what I do, Prisoner 2 is better off confessing, and so
will confess,” and so both will confess. That’s what Game Theory tells us.
Unit 2: Managing a Brand for Growth – Lesson 4: Understanding Competitor Positioning – Game theory – Transcript